Leasing firm Avolon urges Airbus, Boeing output discipline

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By Tim Hepher | February 26, 2013 1:21 PM EST

Leasing company Avolon urged Airbus and Boeing Co on Monday to show restraint in production in coming years to avoid upsetting a crucial balance in the market for their most popular models.

Challenging plans by the world's dominant planemakers to maintain record production as Asia powers up transport growth in emerging markets, Dublin-based Avolon also urged them to lower output temporarily as they introduce newer fuel-saving versions.

Airbus, a unit of EADS , and Boeing have seen strong demand for single-aisle medium-haul planes as airlines update fleets or plan for growth, especially in emerging markets, and plan to produce 42 such jets a month each by mid-2014. Airbus is already at that level.

The two manufacturers have notched up particularly strong sales of fuel-saving versions of those jets due to enter service from the middle of the decade.

Airbus plans to deliver its first A320neo in 2015 and Boeing's revamped 737 MAX is due in 2017.

"As we approach a period of transition into the new aircraft, which coincidentally is about the same as the next cycle downturn, there are a number of reasons to slow the rate slightly," said Dick Forsberg, Avolon's head of strategy.

One reason is the normal impact of a downswing in what remains a cyclical industry - even though Airbus has argued that delivery peaks and troughs are far less marked than they used to be.

Another is to leave manufacturers "head room" to allow for glitches and ease pressure on the supply chain as assembly lines switch to the new versions, equipped with the latest engines.

"It makes no sense to keep going at 42 (a month) come what may," Forsberg said.

Neither manufacturer, fierce rivals in a market for such jets estimated at $2 trillion (1.3 trillion pounds) over 20 years, has given any sign it is willing to give up any deliveries as they battle to maintain a roughly equal share of the largest market segment.

However, there has been less talk of driving production to even higher levels amid growing worries about the supply chain.

John Higgins, president and chief commercial officer of Avolon, said concerns about overproduction had eased in the past 12 months. Last year saw heated rhetoric over plane sales.

"Sanity and economics have prevailed," he told reporters on a conference call, adding that after a bout of matching production forecasts both firms were appearing more pragmatic.

SMOOTH TRANSITION

The introduction of fuel-efficient models, led by Airbus in late 2010 and then Boeing almost a year later, has triggered intense transatlantic competition.

Their arrival raised concerns among investors that the value of existing A320 and Boeing 737 models would dwindle as airlines switch to the new types. But Avolon said it would take more than eight years for the new types to build a "critical mass" in fleets.

However, in a detailed report on the transition between old and new models, seen as one of the key aerospace industry events this decade affecting airlines and parts suppliers worldwide, Avolon said planemakers should keep a lid on production.

"Continued discipline on the part of the (manufacturers) with respect to production rates is a critical factor in maintaining the supply and demand balance," the report said.

Airbus, which last year suspended plans to increase single-aisle output to 44 a month because of pressures on its suppliers, dismissed a French newsletter report on Monday that it was now considering increasing production to 46 a month.

Airbus executives have said higher output will be needed as passenger traffic rises but is not an immediate priority.

The European company, a subsidiary of European aerospace group EADS, increased production of A320-family aircraft to 42 a month from its French and German assembly plants in October.

Boeing currently produces 35 737s a month at its Renton plant near Seattle. It plans to step up to 38 in the second quarter and 42 in the first half of next year, a spokesman said.

The business cases for the two revamped models of best-selling jets depend on savings of some 15 percent in fuel consumption, though each side claims to outperform the other.

Avolon, which recently placed orders for both types that it plans to rent to airlines, said the performance would not be known for sure until the aircraft entered service.

But it predicted the economics of the new planes would make sense as long as oil prices stayed above $65 a barrel. The current North Sea Brent level is around $114 a barrel.

Avolon is owned by a group of investors including private equity firms Cinven, CVC Capital Partners and Oak Hill Capital Partners as well as GIC, the investment arm of Singapore.

(Reporting by Tim Hepher; Editing by Chris Gallagher)

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